Spend Management: Preparing for an Economic Slowdown (Part 3)

No one likes to be the economic naysayer (unless, of course, he's shorted the market and is looking to make a buck). But considering that I've been almost entirely out of the capital markets for quite some time, I have limited personal financial interests in which way the economic tides turn. This makes me about as neutral an observer as it gets, especially if you consider that I get to talk to all types as I write this blog on a daily basis. My various conversations each day often include exchanges with procurement executives and managers, consultants, financial types (e.g., fund managers and venture capitalists), technology vendors, and even suppliers (in fact, one of our suppliers from China is staying with us for the next few weeks). And what I'm sensing in virtually all of these conversations -- not to mention the news headlines -- is that we're getting ready for an economic slow-down and a possible recession in 2008, at least in North America.

In the first two parts of this series, which you can find here and here, I explored how procurement organizations can consider moving their companies from fixed to variable cost structures in down markets as well as the advantages of sourcing and re-sourcing categories that were previously bid under different market conditions. Today, I'll turn my attention to a topic that I've been thinking and writing about quite a bit recently. And that -- you've probably guessed it already -- is the importance of proactive supply risk management during an economic slowdown.

Now, you're probably already saying to yourself that you've made some investments to better understand the operational risk that certain key suppliers pose if they go out of business. But the key to supply risk management is not just focusing on the critical few suppliers who might appear strategic, but rather your entire supply base. That's because it's that one supplier you forgot about -- maybe you just get a container or less than a truckload of shipment from them every quarter -- who can be just as disruptive as your higher volume suppliers if something goes wrong (which is more likely than ever in a down market).

Supply risk management in a downturn also goes beyond merely looking at supplier financial viability on the tier one level. It's essential to look at lower tiers as well. And don't discount areas outside of supplier financial viability. When suppliers cut corners to stay in business, quality and performance are some of the earliest areas to decline. Unless you understand the detailed trending performance data from suppliers -- and can drill-down by facility, ship-to-location, etc. -- it is impossible to get an accurate gauge on what is really going on and take action before it's too late. Taking a hard look at compliance management is also a key element of managing supply risk in a downturn. Whether your activities involve gathering and vetting quality and industry certifications or monitoring the labor practices of your suppliers, it's critical to consider that suppliers are more likely to cut corners and even misrepresent their credentials if staying in business becomes a top order priority. This is especially true in the case of global sourcing, where compliance management is already even more challenging.